Stocks: The Street Feels Citi's Pain

A Goldman downgrade of the financial giant’s shares sparked a sell-off Monday. And there's little relief in sight

Call it the quintuple whammy. An already reeling stock market faced another nasty bout of selling Monday thanks to the five-member tag team that has pummeled Wall Street into submission thus far in November. The fearsome lineup in the other corner includes (1) fears of a possible housing-led recession, (2) a deepening credit crunch, (3) the fallout from the subprime crisis on financial institutions, (4) a weak U.S. dollar, and (5) high oil prices.

Oh well, at least Thursday is an off day.

On Monday, the Dow Jones industrial average tumbled 218.35 points, or 1.66%, to finish at 12,958.44, closing below the psychologically significant 13,000 level. The broader S&P 500 index fell 25.47 points, or 1.75%, to 1,433.27. The tech-heavy Nasdaq composite index shed 43.86 points, or 1.66%, to 2,593.38.

Activity in the broader market was resoundingly negative. On the New York Stock Exchange, 27 stocks declined in price for every six that advanced. NASDAQ breadth was 24-6 negative. The CBOE volatility index, widely regarded as a stock market "fear gauge", was up 2.2% at 26.06. Trading was active amid growing talk of a recession, says S&P MarketScope.

Market players can anticipate a slow week with the Thanksgiving holiday Thursday, says S&P MarketScope. Wall Street will be watching the October housing starts report on Tuesday, and the Reuters/University of Michigan consumer sentiment index and the index of leading economic indicators slated for Wednesday.

Of the troublesome quintet mentioned at the beginning of this story, it was (3) who took the hardest shot at stocks on Monday. Already shaky market sentiment was hurt as Goldman Sachs (GS) downgraded Citigroup (C) shares to a "sell" and said the company may have to write off $15 billion for debt losses over the next two quarters.

Goldman analyst William Tanona said in a Nov. 19 note that he feels Citi will face many industry- and firm-specific challenges in the next six months that will cause it to underperform its industry peers. Tanona sees a laundry list of negatives for Citi, including additional write-offs on its remaining $43 billion of collateralized debt obligation exposure; pressure on the company to shore up its Tier-1 capital ratios; and deteriorating consumer credit trends that will lead to higher loan-loss provisions and charge-offs. Citi shares fell 5.9% Monday.

But Tanona didn't stop there. The analyst also cut Goldman's target prices on E*Trade Financial (ETFC; -13%), Merrill Lynch (MER; -4%), JPMorgan Chase (JPM; -4%), Bear Stearns (BSC; -5.1%), Morgan Stanley (MS; -3.4%), and Lehman Brothers (LEH; -2.9%). Writing on prospects for the large-cap investment banking group, Tanona said he sees limited near-term relief in credit markets, based on his forecast that housing prices will significantly deteriorate well into 2008, resulting in higher write-offs of mortgage-related assets. He also expects higher unemployment rates and deteriorating consumer credit trends.

It was no surprise, then, that financial issues led the way lower for the broader market on Monday. Among the worst performing groups in the sector: The S&P Thrifts & Mortgage Finance index, which fell more than 5% after a Credit Suisse report said that Freddie Mac (FRE) may recognize a loss of between $1 billion to $5 billion on its subprime AAA portfolio. Separately, Fannie Mae (FNM) was downgraded by Friedman Billings to market perform from outperform. Freddie slumped 7.9%, while Fannie was lower by 7.6%.